JA Solar (JASO) – August 6, 2007
Even a hard core fundamentalist knows what a moving average is. A moving average is the average price of a stock (commodity, bond, etc.) over a specific number of periods. To find a 20-day simple moving average, you total the prices over the last 20 days, and then divide by 20. The result is your data point for today. Each day you do the same thing, dropping the oldest data point, including the most current data point and then dividing by 20. As the stock trades, the moving average acts as a lagging indicator of price changes.Traders often look to the 50-day moving average or the 200-day moving average as reference points for making decisions. For example, a short seller of a high flying stock may choose to cover his short when the stock reaches the 50-day moving average. A patient bull may simply be waiting around the 50-day moving average of a stock he wants to buy. Only when the stock gets close to the 50-day moving average will he buy the stock.
Simply put, moving averages reflect prior price movement, but they can also impact current and future price movement because of the attention they attract.
But don’t just jump to conclusions about the importance of a moving average. Instead, look to see whether the stock has behaved differently around the moving average to see whether that moving average is relevant to the specific stock you’re watching.
Let’s look at a daily chart of JA Solar (JASO) to see how the 50-day moving average can impact price movement.
Notice how the stock broke out in mid-April, running from $20 up to $27.50 in just a few days. But over the next month the stock pulled back to meet the 50-day moving average, where it bounced. Over the next month, the 50-day moving average defined the level of strongest buying as JASO skipped along this uptrending lagging indicator.
Now we see that JASO has fallen all the way back to meet the 50-day moving average once again. Does this mean that the downtrend must end and the uptrend must resume? No way. JASO could fall through the 50-day moving average without even pausing. But because the 50-day moving average has been relevant before, then we should expect some degree of buying interest right here. If, however, that buying interest does not materialize, then we’ve got to look for the next group of buyers clear down at $27.50 — 15% below current levels.
Now, we can find any number of charts where the 50-day moving average is totally irrelevant to the price action. But when we see a chart where the 50-day moving average has a history of coinciding with support, it is usually profitable pay attention when the price meets up with the 50-day moving average.
Dan Fitzpatrick
www.stockmarketmentor.com